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Rents Down but Land Values Remain Strong in Central Business Districts

Rents Down but Land Values Remain Strong in Central Business Districts

Photo by Robin Kutesa on Unsplash

The COVID-19 pandemic caused the Philippines’ economy to deteriorate tremendously in the first half of 2020. While the economy showed signs of improvement by the year’s end, there is no denying that many sectors have felt the full weight of the virus’ effects–including the real estate industry.

The Lobien Realty Group (LRG), one of the fastest rising real estate consulting companies in the Philippines, reports that, currently, there is an 8% vacancy of office spaces across all Metro Manila business districts. In the 4th quarter of 2020, supply of office space in Metro Manila totaled 739,312 sqm. Of this number, about 57.59% or 425,778.83 sqm. is occupied or remains leased, with available remaining supply at 313,533.17 sqm.

From an average rent of Php1,160.00 per sqm in February of last year, the current value has gone down 3% at Php1,120 per sqm. The bigger decrease in rental rates brought about by the exit of POGOs was prevented due to the usual one-year advance rent and deposits required by landlords of POGO tenants as well as the norm that tenants and landlords wait for the renewal period to renegotiate rental rates. LRG expects renegotiated rental rates to remain in their current level or at the minimum, become lower by 10%.

The highly affected cities are Makati, Taguig and Bay Area, which have had the highest asking rates for the past three years. The Grade A buildings in these CBDs have already shown an 8% to 11% decrease from their rental rates for the same period in 2020.

The three major factors that affected rental rates in Metro Manila CBDs are: (1) Closure of offices of many tenants, led by POGOs who exited the country in droves 2) The postponement of new and current companies’ start of operations and expansion plans—and the resulting space-taking based on these activities—have almost halted; and (3) the health risk has forced many companies to temporarily rely on work from home arrangements, reducing any need for office space.

As a response, LRG’s CEO Sheila Lobien says office property owners in CBDs have done the following to stay afloat: (1) they are not forcing the issue and are patient with the current situation; (2) they have slowed down some planned construction in anticipation of high vacancy rates and lower rental rates; and (3) they have become more flexible in their rental expectations and are actually giving rental discounts to existing tenants and/or offering lower rents to new ones which can be as high as 20% off versus pre- pandemic rates. Most are also offering their office spaces with furniture which were left in good condition by the previous tenants. LRG advises that prospective tenants should already start scouting for their preferred CBD, buildings and office cuts to maximize the current situation.

Despite the slowdown in office space take-up due to the pandemic, commercial property values in the CBDs have remained almost the same because of the low and finite supply of land in these locations.

Generally, LRG has not observed any significant decline in land values in CBDs due to the pandemic.

Most of the landowners are also expected to comfortably survive the pandemic because of the robustness of their companies and the possibility that they have secure cash positions. The Bayanihan Law has also given assistance to many landowners. Moreover, property owners also expect this pandemic to be temporary. Lobien says that when vaccines are available and the economy recovers, capital values will be back to where they were pre-pandemic.  She says that while there are some landowners who may have been already highly leveraged pre-pandemic who may need to sell properties at lower prices for debt servicing, they are quite few and not yet currently in the radar.

As the pandemic curve flattens, the COVID vaccine rollout looms, more quarantine restrictions are lifted, and even the Department of Health targets to place the entire country under Modified General Community Quarantine (MGCQ)  within the 1st quarter of 2021, LRG is hopeful and optimistic about the future. LRG believes that the new normal may be different, but a new normal way of living and working based on the experiences and lessons learned from the past year should prove to be better or at the very least, safer for Filipinos.

Written by Village Connect

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